Question

If real GDP is $150 billion, full employment GDP is $600 billion, and the marginal propensity to consume is 0.8, then Congress should

Answer 1

Answer:

increase government spending by $90 billion

Explanation:

in order to reach full employment GDP level, the government should increase its spending by $90 billion. Total GDP increase = increase in government spending / government multiplier = $90 billion / (1 - 0.8) = $90 billion / 5 = $450 billion.

GDP will increase from $150 billion + $450 billion = $600 billion